Oil sentiment turns negative on lower demand expectations

Is the worst of the risk asset selling over or was Tuesday’s trading activity just a bit of short covering rally in a broader downtrend that is just getting underway? Tuesday’s trading session saw a partial recovery in equity values in selective market like the U.S. with Europe closing lower and Asia getting ready to start a new session. As is normally the case, the market sentiment tends to quickly react to changes in the status of the global economy as has been the case for the last several days.

As far as the oil complex is concerned the cloud of uncertainty began to emerge last week when the IEA, EIA and OPEC all lowered their projections for global oil demand growth based on a view that the global economic recovery may be starting to slow. The magnitude of the reductions were not very large, but it put the market on notice that oil demand growth may be a larger issue in 2013 than supply.

The second shot over the bow hit Sunday night (U.S. time) when the China’s first quarter GDP came in 0.2% below the fourth quarter level and 0.3% below the market expectations. China is the main economic and oil demand growth engine of the world and if its economy is entering into a slowing pattern the cloud of uncertainty will grow very quickly and have negative implications on other economies around the globe as well as on the broad based commodity markets as China is one of the largest consumers of commodities including oil.